A case study on corporate governance strategy adopted by Facebook.

1. Facebook Inc.
A Look at Corporate
Governance
Group 8:-
Aaryan Jain (20DM003)
Aditi Garg (20DM007)
Aman Aggarwal (20DM024)
Aparna Sharma (20DM038)
Ayushi Bansal (20DM054)
Ayushi Garg (20DM055)
Disha Bhatia (20DM074)

2. OVERVIEW
after
before
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The Facebook Inc A Look at Corporate Governance Case is
based on a current managerial and strategic problem
being faced by the organization, which must be solved
tactfully to allow progression, as well as maintain a
competitive position.
The case helps examines Facebook's corporate
governance by reviewing information in the company's
proxy statement.
It helps us to become familiar with the nature and type of
information in proxy statements and learn how to examine
various facets of executive compensation and corporate
governance such as the use of stock options and
restricted stock to compensate executives, dual class
share structures, board composition and characteristics,
controlled companies, and classified boards.

3. Summary Compensation
Q1. Review the “Summary
Compensation” (case exhibit
11). What form of
compensation does Facebook
use to compensate its
executives? Why might it use
these forms?
3
Facebook’s compensation
structure is a mix of both
cash and equity
compensation.
The company follows this
method of compensation
because they believe that
equity compensation offers
them the best way to focus
their executive officers on the
company’s mission.
Achievement of the company’s
long term strategic and
financial objectives and to
align the interests with the
long-term interest of our
stockholders.
The company also provides
additional awards which they use
as a long-term retention tool and
provide the executive officers
with long term equity incentives.

4. 4
What might be the pros and cons to using this
form of compensation?
Equity-based compensation is always more complicated than cash.
Need to work with an experienced tax and securities attorney to
ensure that your equity compensation doesn’t need to be
registered under federal/state securities law and meets the
necessary anti-fraud provisions.
The timing and structure of your equity-based compensation will
have numerous tax implications to the company.
There’s always a risk that you’ll end up giving away too much
ownership of the company.
Equity-based compensation may create a problem when the
founders want to sell the company instead of an IPO.
The tax issues associated with equity compensation can get very
complex.
When offering equity to employees, founders may need to provide
more transparency about finances than they expected or are
comfortable with.
Ties the employee's financial reward to the success
of the business, aligning the employee's self-interest
with the Company founder's self-interest
Does not generally involve Company cash and is
therefore an attractive compensation technique for
the company
Generates "leveraged" tax deductions, namely
deductions in excess of the Company cash expended;
Allows the Company to better attract and retain key
employees.
Pros Cons

5. Q1. How is the value of stock awards determined, and do
these values affect the financial statements?
5
Stock-Based Awards means the right of any kind to receive Stock
or benefits measured by the value of a number of shares of
Common Stock, and each award of any kind consisting of Stock,
in each case, granted pursuant to the Plan or any other plan of
the Company or its Affiliates.
The most convenient way of calculating the value of stock
option(award) is to take the value of the company, divide by the
number of outstanding shares and multiply by the number of
options you have.
Under US GAAP, stock-based awards is recognized as a non-cash
expense on the income statement. Specifically, Stock award
expense is an operating expense (just like wages) and is included
in SG&A and other operating expenses.

6. Q2. Review the “Shares Beneficially owned “
table (case exhibit 5). Why Facebook have two
classes of shares?
How much voting power does Mark Zuckerberg
have?
If the company paid the dividend, roughly
what he should receive?
Why might the difference between voting and
cash flow (Dividend) rights be important?
Facebook has two classes of shares so that it can
provide different voting rights to different sets of
investors. I.e., to Facebook’s large investors and other
shareholders.
Zuckerberg owned about 400 million shares(8.7 million
class A shares , and 392.7 million class B shares)
He also owned additional 48.9 million shares held in
various trusts.
These shares gave him 53.3 % of the voting power
(59.9% if we also include the shares in the trusts.)
Mark Zuckerberg should receive
(8748571+392712180)*5.49=2,20,40,19,522.99.

7. Q3. What is a Controlled company and a
Classified board?
Controlled Company:
More than 50% of the voting power for the election of
its directors is held by a single person, entity or group
They are not required to have a majority of the board of
directors as independent
They are not required to have a compensation
committee or an independent nomination function
Classified Board:
Directors serve for different term lengths
A classified board will have three to five classes of
positions on the board
A classified board limits the number of board members
up for re-election in any given year

8. 01
02
03
04
Majority of the Board of Directors are independent even
though its a ‘controlled company’
Meetings of BOD are held without the presence of the
management
Members of the committees satisfy the independence
standards established by SEC and Nasdaq rules.
Has a classified Board of Directors consisting of three
classes.
Q3. Read the description of the
Board (case Exhibit 8).
How do you feel the ability of
Facebook’s Board to represent
shareholders?
Facebook’s ability to represent shareholders:

9. 9
Benefits
Interests of the company
are aligned.
Decisive action is easy to
enact.
Right to approve or
disapprove proposed
changes.
No external influence
while carrying out
responsibilities.
Drawbacks
Increased Stock Volatility.
Lesser returns.
One-sided decisions
presiding over company
motives.
Transfer of the resources
of the company for
private purposes.
Q3. What does that
mean for Facebook
investor?

10. The implications of this information in terms of corporate
governance can be as follows:
Public discussions about pay levels can create a
negative impact on the company’s culture and can
reduce the overall morale among employees.
The employees may not like that their pay level is
well below median employee pay or that they’re
being paid far less than if they worked at a competing
company
The disclosures may prompt employees to place
pressure on companies to increase standard
employee pay rates.
Boards may feel that they need to steadily increase
employee pay to keep workers content and prevent
turnover.
Q4. Facebook disclosed the median Facebook
employee has a total annual compensation
over $240,000. What might be the implications
of this information in terms of corporate
governance?

11. Thank You!